" Importantly, the discussion wasn’t framed around forecasting the next big theme, but around positioning portfolios for a market where price sensitivity is returning."

• Qoute reminds me of the high Pe ratio Growth stocks: PME, NWL, HUB, JBH,
• some said Passiove Funds going into Banks like CBA eye watering share price at the time..
• Valuations Stretched CAT & BVS

Forager’s Steve Johnson says momentum is driving markets and creating opportunity

Steve Johnson explains how momentum distorted prices in 2025 and why that is opening new doors for disciplined investors.

21st Jan, 26

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Stephanie Gardner

Livewire Markets

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Markets delivered respectable headline returns in 2025, but for active investors, the year was anything but straightforward. Beneath the surface, dispersion was extreme, leadership narrow, and sentiment shifts abrupt.

Australia, in particular, lagged global peers (the ASX 200 finished 2nd last out of 24 major stock indices in 2025), even as pockets of the market delivered outsized gains. For fund managers willing to stay disciplined and occasionally uncomfortable that volatility created both opportunity and frustration.

Source: Bloomberg, Forager Fund Update Webinar - December Quarter 2025

In Forager Funds’ December quarter update, the team - Steve Johnson (CIO), Harvey Migotti (Portfolio Manager) and Nicholas Plessas (Analyst) - reflected on a year where small caps finally began to close the gap, momentum-driven excesses started to unwind, and valuation discipline was tested across both local and offshore portfolios.

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Importantly, the discussion wasn’t framed around forecasting the next big theme, but around positioning portfolios for a market where price sensitivity is returning.

As Forager’s Chief Investment Officer, Steve Johnson put it during the webinar:

“The last quarter of the year only serves to enhance how momentum-driven markets have become, and how important that is in terms of us finding attractive long-term investment opportunities.”

What followed was a candid assessment of what worked, what didn’t, and where Forager is increasingly finding opportunity, particularly within Australian industrials and small-cap stocks that have been left behind as sentiment swung.

Steve Johnson, Chief Investment Officer, Forager Funds

Australian small caps finally reassert themselves

After years of underperformance, Australian small caps staged a meaningful comeback in 2025. The Forager Australian Shares Fund returned 24.77% for the year, broadly in line with the Small Ordinaries Index, but well ahead of the All Ordinaries’ 10.5% gain.

Source: Forager Fund Update Webinar - December Quarter 2025

Nicholas Plessas noted that while index-level results looked strong, the drivers were narrow. Resources, particularly gold-related names, accounted for much of the headline outperformance.

“A lot of that outperformance has been driven by the resources companies,” he said, adding that industrial small caps actually lagged, creating dispersion beneath the surface.

Source: Bloomberg, Forager Fund Update Webinar - December Quarter 2025

That dispersion mattered. Forager had little exposure to resources, instead focusing on industrial businesses where revenues are more controllable and forecasting confidence is higher.

According to Steve Johnson, “The weakness in our part of the market — that industrial side of things where we are much more comfortable — is a positive thing in terms of new opportunities.”

Taking profits as valuations stretched

A defining feature of 2025 for the Australian fund was knowing when to step aside. Forager exited several high-profile small-cap technology holdings as valuations ran ahead of fundamentals.

Catapult (ASX: CAT) and Bravura (ASX: BVS) were both sold during the year, with Plessas describing Catapult’s ASX 200 inclusion as a classic example of momentum overshooting reality. 

“It added a dollar in the course of five trading days. At that point, the business was trading at more than ten times forward revenue estimates, and we decided we were getting a very full valuation.”

That discipline has since been vindicated. Both stocks have retraced sharply, reinforcing Forager’s view that liquidity-driven moves can reverse just as quickly as they appear.

Leaning back into unloved industrials

As former winners pulled back, Forager began adding to positions where operational performance remained intact, but share prices weakened. IDP Education (ASX: IEL), EML Payments (ASX: EML) and NZX (NZX: NZX) were all increased during the December quarter.

Johnson highlighted the importance of separating business performance from share price action: “We’ve had some pullbacks in share prices of businesses that were actually delivering really good progress. From much less demanding share prices today, the prospects are good.”

The fund also trimmed long-held mining services exposure, including Macmahon (ASX: MAH), where valuation discipline again took precedence. “It’s still a cyclical industry,” Johnson said. “We’ve been very disciplined about making sure we’re not left holding the can when that cycle turns.”

When pain creates optionality: OFX and early-stage ideas

Not every position worked. OFX Group (ASX: OFX) detracted from performance, both operationally and in share price terms. Still, Plessas argued the underlying asset remains attractive. 

“This is a business that’s been around for decades, with 30,000 corporate customers and $200 million of revenue,” he said. “If the turnaround doesn’t work, we think this business could be very valuable in the hands of a larger-scale FX player.”

Forager also discussed earlier-stage positions, including Aroa Biosurgery (ASX: ARX), which Plessas described as “one of the most industrial-like companies on the ASX and definitely within the biotech industry.” With revenue above $100 million and good incremental profitability, Forager believes the market is only beginning to recognise its operating leverage.

Source: Forager Fund Update Webinar - December Quarter 2025

A more fertile hunting ground for 2026

Despite markets near highs, Forager is more optimistic about the opportunity set than it was three months ago. Small-cap tech, quality industrials, and previously crowded trades are all being re-priced. As Johnson summed up: 

“You buy the right business, and you never know when it’s going to happen, but ultimately the share price will reflect the value of it.”

For Australian-focused investors, 2026 may prove less about chasing what’s worked and more about patience, valuation discipline, and being ready when sentiment turns.

Stocks mentioned

asx: CCL - Cuscal Ltd - deposit taking institution

RDY

NZX

PPS

TYRO

NAN

Experience

AMA

ASX:ARX

ASX:BVS

ASX:CAT

ASX:EML

ASX:IEL

ASX:MAH

ASX:OFX

It wasn't that long ago that Forager were having a rough trot. Good to see them back and topping the fundie rankings

Most of those timeframes look decent for SJ's Forager Funds @Strawman however not all of them with negative returns in both funds over the past 3 months and mediocre returns for the Australian Shares fund since inception (10.16% p.a.) and over 10 years (8.37% p.a.).

They have had some outstanding years and also some shockers.

That article you linked to contained the following:

• Forager has also benefited from Johnson’s decision to stockpile cash when the sharemarket went on a tear after US President Donald Trump’s election victory in November. The value fund went from a 6.7 per cent allocation in August to 12.7 per cent at the start of March.
• While Johnson said he has deployed a quarter of that capital last month, he is waiting for investor panic to reach fever pitch before pouncing on other stocks on his watch list like Johns Lyng, Audinate, PWR Holdings and Nuix.

--- end of excerpt ---

Audinate?, yes, Nuix?, no. But that's just my opinion.

The following article from Graham Hand at Firstlinks (used to be CuffeLinks, started by Chris Cuffe, now Firstlinks and owned by Morningstar) back in July 2022 (so almost 3 years ago) is interesting also: https://www.morningstar.com.au/funds/poorly-performing-fund-managers-start-the-apology-tour-firstlinks-newsletter

Excerpt:

• What are the explanations? Here is one of the more honest and open from Steve Johnson of Forager. In FY21, Forager's two funds returned an exceptional 79% (global) and 87% (Australian). Then in FY22, losses were 38% and 28% respectively. Over two years, most clients are probably happy, but not if success encouraged investment in June 2021. Johnson is upfront:
• "In our International Fund, we took baby steps when giant steps were required ... We were aware of and vocal about a bubble in growth stocks. I wrote a CIO letter in our December 2020 Quarterly Report warning about the risks of higher inflation. We sold half our position in some stocks that were beneficiaries, three-quarters of our stakes in others ... But the returns have still been terrible. The remaining investments in the winners of 2021 tumbled, some more than 70% ... Paraphrasing Warren Buffett, predicting rain doesn’t count if you don’t build arks as well. Our portfolio changes were meaningful but they needed to be dramatic. Patience is usually a virtue but there are times when urgency is called for. The 2022 financial year was one of them."

--- end of excerpt --

While SJ is suggesting there that much of the problem was that they didn't go hard enough when opportunities presented, Forager's biggest losses in their Australian Shares Fund were from sticking with bad companies when they should have recognised the investment thesis was busted and sold out. Companies like those towards the bottom of the table below:

Source: Page 6 of: https://announcements.asx.com.au/asxpdf/20220831/pdf/45dkg29srjmpyf.pdf [the FASF Appendix 4E for the financial year ended 30 June 2022]

Sure, some of those companies came good, like Catapult and Gentrack, even Macmahon and some of the ones even higher up that list provided good returns for the fund in subsequent years, and many had provided good returns in prior years, but those down in the red there towards the bottom of that table - they're mostly rubbish, and they were mostly rubbish in 2022 as well, but Forager's Australian Shares Fund (FASF) held them right through that year.

Those percentages down the bottom of that table above aren't how much those companies fell by, it's much worse than that, those numbers represent the percentage contribution that each of those positions made to FASF's -27.91% (negative) return in FY22, so for instance iSelect, a true basket case that provided plenty of red flags and reasons to exit the stock during that year, was responsible for -1.7% of that -27.91% return, and Whisper was responsible for another -3.7% (negative 3.7%) contribution to that -27.91% (negative 27.91%) return for that year. There were actually only 3 (three) companies out of the 25 that were held in that fund at any time in FY22 that actually provided positive returns, as shown above.

Being slow to cut a company loose can provide outsized returns when their share price is rising at a good clip, but being slow to act certainly does magnify those losses when a company is sinking like a stone.

The following chart and comments about the limitations of passive Index Funds (ETFs) is from an article on the Forager site that examines the dreadful recent performance of Platinum (PTM) and Magellan (MFG) in terms of investing in the fund management companies rather than the funds themselves: https://www.foragerfunds.com/news/the-platinum-canary-in-the-active-funds-management-coalmine

Excerpt:

While it is causing stress for many, the rise of index funds provides a simplicity to our purpose that is like living in the 1960s. There are not many things left that index funds don’t do well. Big blue chips at a very low cost were the first thing to go. Now you can also replicate quality, growth, value, and dozens of other factors in low-cost index funds. That leaves Forager with two clear areas where we can add value, and the past year has provided plenty of examples.

Index funds work best in markets that are already relatively efficient and where the value of stocks traded is high. The less efficient the market, the more value there is for active fund managers.

In stark contrast to large cap funds, almost none of which have been able to outperform the index over a 10-year period, small and midcap managers have a strong track record of market outperformance in Australia. According to Morningstar data, the more than 100 funds categorised as mid/small have outperformed the ASX Small Ordinaries by 3.5% over the past five years and 2.8% over 10.

Morningstar Category: Australia Mid/Small Blend

Source: Morningstar as at 30 November 2024

Identifying those smaller companies that can become future index constituents has been particularly fruitful, with Gentrack, RPM Global, Flutter and Ferguson providing wonderful returns to both Forager funds over the past year. To keep winning at the small end of the market, fund managers need to be willing to stay small themselves.

--- end of excerpt ---

Source: https://www.foragerfunds.com/news/the-platinum-canary-in-the-active-funds-management-coalmine

---

Agreed, but they also need to know when to call a thesis "busted", and I reckon Forager have made some big improvements in that area since FY22, hence them being back in the winners list:

Source: https://www.afr.com/markets/equity-markets/how-forager-s-johnson-topped-the-fundie-tables-by-embracing-passive-20250422-p5lth1

Catapult and Bravura are of course examples of companies that had big share price declines and yet were well worth holding onto, because they did come good, albeit with new management and a change of strategy, so that's the rub; deciding whether a thesis is really busted or not. A precipitous share price decline alone doesn't prove anything; it's just a clear signal to do some digging if you don't already think you know why the market has gone so negative on the company, but a history of poor management decisions, and/or a broken business model, and/or the company's moat (competitive advantages) evaporating because of new competition or a new operating environment (including new technology) are some examples of factors that could signal a busted investment thesis. It all depends on what the thesis is based on of course.

Just as a fund manager or an individual investor is only as good as their individual investment theses (ITs) are, they can sabotage their own performance if they don't exit companies quickly when they know that the IT is busted, or because they don't realise that the IT is busted. Or they indulge in thesis creep, another common mistake.

Forager got that part wrong in 2022 IMO, but have done better since.

I think that's fair @Bear77 and I'm sure Steve would even agree with a lot of that.

As a general rule I'm usually pretty unkind to fundies, but I give the Forager team a good deal of respect for things like alignment, accountability and transparency. A good reminder that there are some good people in the game.

Also, I have to put my hand up for suffering the same affliction of holding companies for too long when it's no longer deserved. I'm a master at thesis creep!

Agreed that SJ is one of the good guys @Strawman I have met him a couple of times back when their Forager roadshows used to do all of the capital cities around Australia and he was always very honest and upfront with what they had done wrong as well as what they had got right. I also spoke to Alex Shevelev once - same thing. It was refreshing when a lot of the others in the game at the time were more about hype and before fee returns and stuff (NAOS, WAM, etc.) and always focused on their winners and largely ignoring their losers. Forager was a good bunch. Pity they had to yank FOR off the ASX list due to underperformance at the time coupled with a persistent discount in the share price (vs. its NAV). It's done better since it's been taken off the ASX.